Weida (M) Bhd - 2007

MARC has reaffirmed the A+ID /MARC-1ID ratings of Weida (M) Bhd’s (Weida) RM100 Million Murabahah Underwritten Notes Issuance / Islamic Medium Term Notes Facility. The rating outlook is stable. The reaffirmed ratings reflect the group’s consistent financial performance and its competitive position in the supply of high density polyethylene (HDPE) engineering products to the water and sewerage sectors in Malaysia, in particular East Malaysia. Moderating factors include narrowing product margins caused by raw material price increases, and deterioration of its working capital position as a result of project funding requirements relating to the construction of telecommunication towers under subsidiary, Weida Works Sdn Bhd (WWSB).

Notwithstanding the group’s recurring negative cash flow resulting from WWSB’s joint venture with Common Tower Technologies Sdn Bhd (CTT) since December 2005 to finance and construct telecommunication towers in Sabah, the stable outlook incorporates the expectation of near-term improvement in the group’s cash flow with the proposed issuance of lease receivables-backed securities by a single purpose company to fund the construction of the telecommunication towers. The financing transaction, anticipated to be completed by the first quarter of 2008, would permit a strengthening of cash flow measures. Any significant delay in its completion, however, will exert pressure on the existing ratings.

Weida is an investment holding company with subsidiaries principally involved in the manufacturing and trading of HDPE engineering products such as sewerage and sanitation systems, storage tanks, pressure pipes and drainage pipes for the water and sewerage sectors. Weida has four manufacturing plants, located in Sarawak (Kuching & Miri), Sabah (Kota Kinabalu) and Negeri Sembilan (Nilai). In financial year ended March 31, 2007 (FY2007), the plants operated at 47% of their collective capacity of 16,300 metric tonnes (mt). Weida also manages and maintains the only septic sludge treatment plant in Kuching on a long-term contract and undertakes design-and-build projects for the water and sewerage sectors. The group also ventured into the construction of telecommunication towers in FY2006 through a joint venture with CTT, a Sabah state-backed company. As at August 31, 2007, WWSB has constructed 142 towers, is constructing 30, and has received orders to construct 58 more. In an effort to further diversify its revenue  base, the group  acquired  a controlling stake in a company that is developing a 14,000-acre oil palm plantation in central Sarawak. The plantation is expected to contribute positively to the group after 5 years. In FY2007, manufacturing contributed 47% of the group’s revenue whilst its works segment, which includes construction, contributed 43% of consolidated revenue.

For FY2007, the group’s pre-tax profit grew 48% to RM20.6 million (FY2006: RM13.9 million), mainly attributed to a more-than-threefold increase, to RM12.0 million (FY2006: RM4.1 million), in profit contribution from its works division. Over the same period, the group’s operating margins increased marginally to 12.0% (FY2006: 11.5%), underpinned by the higher revenues and profit contributions from its manufacturing and works divisions. The group recorded negative operating cash flow of RM15.8 million in FY2007 and negative RM4.9 million for the six months ended September 30, 2007. As at September 30, 2007, the group’s gearing level stood at 0.6 times, well below the covenanted cap of 1.50 times.

Major rating Factors

Strengths

• Established player in the supply of HDPE engineering products to the water and sewerage industry;
• Improved diversity of revenue base and continued strong operating performance; and 
• Stable demand fundamentals expected for its principal business segments.

Challenges/Risks

• Negative cash flows since FY2006 due to its telecommunication tower project; and
• Narrowing product margins of its HDPE engineering products.